RBI issues framework for reclassification of FPI to FDI

The Reserve Bank of India on Monday issued an operational framework for reclassification of investment made by a foreign portfolio investor to foreign direct investment (FDI) if the entity breaches the prescribed limit.

Markets regulator Sebi too has issued a circular on procedure for reclassification of FPI investment to FDI.

Currently, an investment made by foreign portfolio investor along with its investor group (FPI) should be less than 10 per cent of the total paid-up equity capital on a fully diluted basis.

Any FPI investing in breach of the prescribed limit has the option of divesting their holdings or reclassifying such holdings as FDI subject to the conditions specified by the RBI and Sebi within five trading days from the date of settlement of the trades causing the breach.

The RBI has issued an operational framework for reclassification of foreign portfolio investment by FPI to FDI.

As per the framework, the FPI concerned will have to take necessary approvals from the government and concurrence of the Indian investee company concerned.

However, the facility of reclassification shall not be permitted in any sector prohibited for FDI, the RBI said.

For reclassification, the entire investment held by such FPI should be reported within the timelines as specified under the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.

Post completion of reporting, the FPI should approach its Custodian with a request for transferring the equity instruments of the Indian company from its demat account maintained for holding foreign portfolio investments to its demat account maintained for holding FDI, the RBI said.

Sebi (Foreign Portfolio Investors) Regulations provide that in case an FPI fails to divest its holdings (in excess of the prescribed threshold), within five trading days, the entire investment in the company by such foreign portfolio investor shall be considered as an investment under the FDI.

The directions have become operative with immediate effect.